If you operate on any centralized exchange in the crypto world, you’re probably familiar with the term KYC/AML procedure. These highly controversial systems have been widely debated in the crypto community and probably will be for years to come. But until some kind of solution is reached regarding them they’re here to stay, so let’s have a little discussion about them.
What are they?
KYC stands for know your customer and AML stands for anti-money laundering. Both are procedures that most centralized exchanges implement in some form as a way to verify the identity of the user.
Why are they necessary?
Well, on centralized exchanges, all private keys are kept by the exchange itself, and should you be locked out of your account for any reason, you’ll more than likely need to be verified as the account owner through the KYC procedure. Also, some exchanges require you to prove you are an accredited investor in order to allow you to participate in token sales. While anyone can buy a token once it’s past the sale period, initial offerings are bought by investors, and should you list with an exchange, your investors will more than likely need to pass a KYC procedure. If you want to have a token sale in certain countries, the United States, for example, your investors will need to prove their identities in order to invest. Depending on the country, they have no choice.
What’s the controversy?
Earlier in the article, we mentioned that these procedures have been highly debated within the crypto community, so why is that? Well put in simple terms, crypto users love their privacy. One of the cornerstones of many cryptos is that you can keep your identity hidden, and thus, keep third parties out of your business. Needing to pass a KYC procedure effectively outs you as a user and now leaves an identifiable trail. Many crypto users condemn the KYC procedure because they believe it goes against the very foundation of crypto which is anonymity. Others have resigned themselves to the fact that these procedures have become more necessary or just a part of working with a centralized exchange.
How does it affect my ICO or STO?
It depends really on the type of offering you have. So let’s start with STOs. If you run a Security Token Offering, most of your investors will need to pass a KYC procedure as they are buying security, according to the US Securities and Exchange Commission. You’ll need to list your token with a special security token exchange where users will need to be accredited investors in order to participate in initial offerings. So you’ll need to be aware of this fact as you’re going through the listing process.
For ICOs, it really depends on the exchange you list with (if you list at all) whether or not the KYC procedure makes an impact on your sale or not. If you list with a decentralized exchange, no investor needs to pass the procedure; such is the nature of decentralized exchanges. But should you choose to list with a centralized exchange, then investors might need to prove their identities before participating in the sale. And each exchange has different procedures — they aren’t all the same across the board. Some only require proof of identification such as a picture of your government ID or passport, others are more extensive and thorough.
So if you’re planning on running a sale, check out what your potential investors are interested in. Depending on what they want, your team will need to choose an exchange to list with based on their needs. And with all of that being said, if you’re not sure how to get started looking for exchanges, or it seems like a big undertaking, AssetRush can help with that search. We’re experts in ICO and STO promotion and thus can help with you exchange research.